Published Editorial

Attracting FDI is key to India's future growth prospects

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The Economic Times

by

Sudhir Kapadia
National Tax Leader
EY

Back in 1991, if anyone had suggested that India was on the cusp of rising from her economic slumber and standing tall in the comity of nations to signify a structural shift in mind-set towards economic policies and the need to welcome businesses rather than shun them with socialistic fervor, it would have at best been termed bizarre and, at worst, unethical.

The India story, since the 1991 liberalization up until 2009, has been well scripted and discussed in various quarters. Similarly, what happened from 2009 until now has been vociferously dissected and, depending on which side of the debate one stands, there are intense views on the management of the economy.

In this backdrop, there is also a refreshingly different approach adopted in the 12th Five-Year Plan where the Planning Commission, for the first time in the history of independent India, has laid down three scenarios on growth linking them to clearly actionable steps. It has ventured to suggest that the average growth rate of 8.2% is possible only when concrete steps are undertaken to contain the fiscal deficit and the current account deficit and fast-track implementation of various projects.

Moreover, the Plan clearly mentions FDI should be a key policy imperative to help achieve the desired growth. It goes on to project an abysmally-low rate of 5% growth in a scenario of "policy logjam".

One clearly senses urgency on the government's part to attract additional FDI in sectors like telecom, defence and retail. This is a good time for us to introspect on the basic factors responsible for foreign investments eluding India.

The FDI policy hasn't offered comfort to foreign investors due to lack of transparency and consistency in the policy. Investment decisions are not dependent on whether the sector is under automatic approval route, but on clarity of investment rules.

Moreover, as these reforms were being announced, Posco, the South Korean steel major, packed its bags to leave India, withdrawing from a $5.3-billion project after waiting for three years. ArcelorMittal terminated its MoU with Odisha for a $12-billion steel plant project after waiting for seven years for projects to take off, re-emphasizing a dire need for consistency and stability of investment policies. Further, adverse tax policy has been one of the most significant factors that have spooked foreign investors. They continue to be uncertain about India's stand on many significant issues.

The seeds of uncertainty were sowed in Budget 2012 when several provisions relating to international taxation were announced, giving rise to uncertainty and instability in the tax system. Post Budget 2012, of course, significant initiatives on the tax policy front have been announced and are underway to assuage the frayed nerves of foreign investors.

However, recent actions on transfer pricing adjustments on capital inflows by foreign holding companies in their Indian subsidiaries don't help the FDI cause. Thus, the recently announced FDI changes, favorable changes in tax policy and other steps like setting up the Cabinet Committee on Investment to clear pending investment proposals, at last seem to suggest India is back in business. But it needs to be appreciated that events of the last 2-3 years have left deep scars on the psyche of foreign investors.

 If all of the above factors weren't enough, we now have the specter of a rapidly falling rupee. Many pessimists have been comparing India 2013 with India 1991 as far as the country's financial balance sheet is concerned, but the comparison could equally be with India rising from the ashes of financial disequilibrium in 1991 to becoming a serious contender for economic growth.

Arguably, India is at the cusp of a second seminal moment in her economic history. The question is: will India rise even higher post 2013, or will we see a continuing downward economic spiral? The answer to this question, to some extent, depends on external factors, but, to a large extent, also on the kind of political leadership that emerges in the general elections of 2014.